Changes to the Capital Gains Inclusion Rate: What You Need to Know

Introduction

On June 11, 2024, the federal government provided further clarification on the upcoming changes to the capital gains inclusion rate, first announced in the 2024 federal budget (Budget 2024). Effective June 25, 2024, the inclusion rate for capital gains will increase from 50% to 66.7% for individuals, trusts, and corporations.

This change has significant tax implications, particularly for those with large capital gains. Below is an overview of what these changes mean and key considerations for taxpayers.

Overview of the Capital Gains Inclusion Rate Change

The new capital gains inclusion rate means that 66.7% of capital gains will be included in taxable income, compared to the current 50%.

To mitigate the impact on individual taxpayers, the government has proposed an exemption for the first $250,000 of capital gains realized annually. Gains up to this threshold will continue to be taxed at the 50% inclusion rate. This measure applies to individuals who realize capital gains directly or indirectly through a trust or partnership.

Notice of Ways and Means Motion & Legislative Updates

On June 10, 2024, the government introduced a Notice of Ways and Means Motion (NWMM), setting the stage for legislative implementation. Additional technical amendments are expected in July 2024, which may further refine how the changes apply.

Notably, graduated rate estates (GREs) and qualified disability trusts (QDTs) will continue to benefit from the 50% inclusion rate on up to $250,000 of capital gains per year.

Effective Date and Tax Implications

If passed, the new rules will apply to capital gains realized on or after June 25, 2024. This gives taxpayers a short window to assess their financial positions and consider any necessary tax planning strategies.

Impact on Tax Rates

• For individuals in the highest tax bracket, the inclusion rate change will result in an 8% to 9% increase in capital gains taxes on amounts exceeding $250,000.
• For corporations and trusts (excluding GREs and QDTs), the higher inclusion rate applies to all capital gains, without a $250,000 exemption.

Should You Take Action Before June 25, 2024?

The increase in the capital gains inclusion rate means higher taxes on the sale of investments, real estate, and other capital property.

Before selling assets to take advantage of the current 50% inclusion rate, consider the following:

Alternative Minimum Tax (AMT) Considerations

• Large capital gains could trigger AMT for individuals and certain trusts, affecting tax liability.

Residential Property Flipping Rule

• Selling a Canadian residential property held for less than one year may result in the gain being taxed as business income (100% taxable) rather than as a capital gain.

Qualified Small Business Corporation (QSBC) and Qualified Farm and Fishing Property (QFFP)

• The lifetime capital gains exemption (LCGE) will increase to $1.25 million (from $1,016,836) on June 25, 2024, which could offset some tax impacts for eligible taxpayers.

General Anti-Avoidance Rule (GAAR)

• The proposed GAAR amendments introduce higher penalties for tax avoidance transactions. Consider whether any preemptive sales might be scrutinized under these rules.

Market Conditions and Loss of Tax Deferrals

• Selling assets now may lock in gains at current market prices, removing the possibility of future tax deferral on unrealized gains.

Key Takeaways

The increase in the capital gains inclusion rate marks a significant change for investors, business owners, and corporations.

Ensure any transactions are completed before the deadline if you choose to act.

Assess your financial situation now. Consulting a tax advisor is essential to determine whether realizing gains before June 25, 2024, is beneficial.

Consider all factors, not just tax savings. A cost-benefit analysis should weigh market conditions, cash flow, and long-term investment goals.